China’s thermal coal futures have tumbled by more than 50% from a record high since the government adopted a raft of measures to stabilize prices and boost supplies. While the decline has recently lost some steam on a rosy demand outlook, the prices seemed not to touch the bottom yet in sight.
The most-traded contract for delivery in January on the Zhengzhou Commodity Exchange closed the daytime session at 809.6 yuan/t on November 15, a 7.2% fall from a day earlier.
Through the perspective of the linkage between futures and spot markets, does this mean that there is a possibility of further steep falls in the spot prices?
As spot prices have leveled out from a sharp fall for weeks, people were wondering if there would be another wave of decline. This is where the price discovery function of futures comes into play. Generally, futures move ahead of the spot and always guide the latter’s rise and fall.
While the expected market supply-demand relation reflected by the futures and the real fundamentals reflected by the spot may differ to a certain extent, the futures market now remain in severe backwardation, still suggesting a further fall in the spot market in the next month.
Some changes were observed in the spot market recently. More inquiries were emerging in the market, indicating downstream buyers still have interest in spot coal though the demand of most utilities can be met by long-term contracts. But buyers pressed prices down hard, indicating that they are not in a hurry and trying to test sellers’ reactions.
Sellers, on the other side, were very cautious of giving offers. They were reluctant to trade when prices were falling, as Sxcoal has learned, but were worried prices may continue to fall.
Under the interplay of various emotions, the current market transactions are still relatively sluggish and prices are temporarily stable.
From the view of supply-demand fundamentals, the latest official statistics showed the country’s coal production totaled 375.09 million tonnes in October, a 4% rise year on year and 6.88% month on month.
The daily output averaged 11.52 million tonnes in the month, rising for three consecutive months and climbing to the second-highest in three years only to 11.58 million tonnes recorded in November 2020.
Participants contacted by Sxcoal believed coal output in the next few months could stand at this level, citing many coal mines had completed capacity expansion and put them into normal use. Production will continue to remain high unless there are extreme weather effects.
By far, for the time being, the cold winter effect remained insignificant on the daily consumption at power plants, as the rise in coal supply to power plants has been more than that in consumption for weeks.
Later in the winter, if the impact of cold snaps is less than expected, coal consumption at power plants will continue to keep below the supply, and then thermal coal prices would be possible to go further down.
This article has been exchanged under the article exchange agreement between CoalMint and Sxcoal.
Leave a Reply